Sunday, November 23, 2008

Pension Pensives

Went outside to get the paper today and saw the local headlines--Bracing for a Major Pension Fund Hit. Reading through the article you find out that the pension fund makes future estimates based on an 8.5% annual return. Not an unreasonable estimate, even though returns in 2003-2007 averaged 16% annually . You then read that the annual return for the pension fund is lower this year. Again, not surprising, considering the financial crisis. Then there is the prediction that the financial crisis will not truly impact the pension plan until next year. Well, of course. Many people believe that 2009 will be rougher than 2008. But then comes the kicker. They are considering raising taxes to make up for the losses of the pension plan because the pensions "are guaranteed by law and will not be affected by the downturn in the financial markets."

Excuse me?

Let me see if I have this straight. Teachers have to contribute about 5-7% of their salary to he pension fund. I contribute about 8-10% of my salary to my 401k. Their pension fund guarantees replacement of a very good percentage of their preretirement income when they retire, typically at an age earlier than most working Americans. My 401k will offer me only an income based on its growth over time and is limited by inflation. I have no guaranteed income amount each year. Their pension will run for a defined period of time, usually to death. My 401k will run out when it runs out. By today's financial calculators, I have less than an 80% chance of having enough money in retirement before I die. Living longer hurts me more. If their pension fund takes a huge loss from the financial crisis, taxes are raised to make up for the loss. If my 401k takes a huge loss from the financial crisis, I am up the proverbial creek without a paddle. Not only that, but I also now have to spend more of my earned money in taxes to make up for someone's else poorly performing pension fund. Money that I otherwise would have used to make up for my own market losses. And on top of that, they will not increase the salary contribution of teachers to the fund because of a ridiculous rule restricting the percent balance the fund can hold. So while people are getting laid off and taking salary reductions, teachers keep making the same amount.

How does this make any sense?

The answer, or course, is that it does not. It is a smaller model of the $700 billion socialist lobbying scandal that Congress approved because of the heightened fear they created. That is not to say there should be no fear of the financial crisis, just not the little-girl-in-the-woods-alone-at-night-with-coyotes degree of fear that was manufactured. You are paying to fix other people's troubles, who in turn will do little if anything to fix your troubles. So I will pay more taxes to pay for the retirements of teachers that save less than half of what I try to save for my tenuous retirement. All the while, they will strike every year because they want more money and more benefits. As the United States falls increasingly behind in education to the rest of the world, teachers are demanding more money because...because why exactly?

In order to solve this problem, the socialism and privatization must be separated. If teachers want to strike and get ridiculous salaries just because they have taught for fifteen years, then they should lose the public support of their retirement. If they want to make $130,000/yr after teaching the same grade and similar curriculum for a decade, then they can save for their own retirement, take the ups and downs of the market, and fund their own benefits. But if they want a public tax supported pension plan, then they need to take fixed salaries with absolute salary caps, and the state should be able to shunt surplus money from the fund for other state projects.

These days pensions are slowly becoming extinct. Only large scale defined pensions exist, and those will either implode or bite the hand that feeds them. With each market downturn, the pension funds available diminish, but the pensions paid out remain constant or increase (as people retiring and receiving pensions outnumber people receiving pension dying). Get another financial crisis like this in the future, when the population of define pension recipients grows faster than the funds, and the system will crash. Unless you can show that high school freshmen know how to multiply and divide two digit numbers or at least spell two syllable words correctly, you cannot justify a tax increase to pay teachers more for the same poor results. And believe me, simple math and spelling are benchmarks that you can easily use to show educational progress because creativity and imagination is worth squat if you cannot construct and write a coherent sentence or calculate the change you should receive from a ten dollar bill for a $2.16 cup of coffee.

Then there is the hypocrisy of tenure. But that is another article.